SWP: drawing a regular income from your mutual fund investments

A Systematic Withdrawal Plan pays you a fixed amount every month from your investments. Here is how it works, how it is taxed, and the one rule to remember.

A Systematic Withdrawal Plan (SWP) is the reverse of a SIP. Instead of investing a fixed amount every month, you redeem a fixed amount, which is credited to your bank account.

How it works

You choose the scheme, the amount, the frequency (monthly or quarterly) and the start date. On each date, the AMC redeems enough units at that day’s NAV to pay you the amount. The remaining units stay invested.

The one rule to remember

If you withdraw more than the investment earns, the capital shrinks, and the withdrawals eventually stop when the units run out. A lower withdrawal rate lasts longer. Our SWP calculator shows how long a corpus may last at different withdrawal amounts and assumed returns.

How SWPs are taxed

Each withdrawal is a redemption. Only the gain portion of each withdrawal is taxed, as short-term or long-term capital gains depending on how long those units were held and the type of scheme. Exit loads may apply in the early period. This can make an SWP more tax-efficient than interest income for some investors, but check with your tax consultant.

Good practices

• Keep one to two years of withdrawals in a lower-volatility scheme.
• Start the SWP after the exit-load period where possible.
• Review the withdrawal amount once a year.